The Science Behind Bundles

Have you ever gone to a fast food drive-thru and wound up ordering more than you planned? Or doubled the size of your online shopping cart on a whim? What about the time that insurance call went from a simple quote to a home-life-auto discount package?

When it comes to products and services, bundles are everywhere. But not all such deals are created equal. Some sell you with convenience. Others incentivize impulse buying. Still others coax you into spending money now, rather than later. We took a deep dive into some of the most popular bundles, combos, and multi-product offerings. How exactly do they work, psychologically? How does one bundle differ from another? And which industries use which tactic most often?

Combining desirable and less desirable products

Typical industries: cable and internet services

There’s no bundle more infamous than cable, the expensive television service that gives you hundreds of channels, at least 90% of which you’ll never use. Throw in Wi-Fi coverage and a landline, and you’ve turned an already large bundle of TV stations into a mega-bundle of expensive technology.

The internet services companies know they’ve got a few products so valuable—reliable internet, live sports—that you’ll tolerate a larger bill and a pile of services you don’t really use. But combining popular and unpopular products comes at a cost: consumers overwhelmingly dislike their cable providers, and they perceive most cable bundles as a bad value. Given that most other bundles at least give consumers a superficial satisfaction in getting a deal, the cable bundle stands out for just how unsatisfying it is.

There are several ways to mitigate this problem—as we’ll see with other types of bundles—whether that involves more consumer choice, limiting the proportion of less desirable products, or shifting the psychological emphasis to other factors.

Reducing the cognitive load

Typical industry: fast food

A good bundle doesn’t necessarily have to be about savings. For fast food, convenience is often an even bigger sell. If you do the math on the most popular combos at big burger chains today, most offer only marginal savings. Still, ordering your food in a combo gives you less to think about or calculate, with a short list of around eight numbered meals—a simple choice between some traditional favorites and new menu offerings.

Still, fast food chains have a history of experimenting with bundling strategies beyond convenience. In the 90s, many fast food combos did indeed provide ample savings over a la carte pricing. Over time, however, the power of the big-savings-combo began to fade with consumers.

More recently, several chains have offered a new twist on combos to increase consumer choice. Instead of choosing between five to 10 pre-made bundles, customers can often pick any four or five items from a “value” section of the menu. This kind of promotion maintains most of the convenience and simplicity, while also giving consumers a stronger sense of control over their order.

Using context-based recommendations

Typical industry: retail

Sometimes all it takes to create a great bundle is the power of suggestion. Brick-and-mortar shops have been doing this for centuries, with quick-grab items near the register, and special promotional products on aisle end caps next to related goods. But thanks to the power of the web, internet retailers have taken this technique to a whole new level. According to a study by McKinsey, 35% of all Amazon purchases come from recommended items—a form of bundling worth tens of billions per quarter.

Bundling techniques like these have the tremendous advantage of putting control in the hands of the customer—at least psychologically. Even if the shop or website chooses which items to recommend, shoppers curate the final version of their cart. Unlike with cable bundles, these combos create a win-win where the seller makes more money, and the buyer maintains some sense of agency. If there’s any downside for the customer, it’s that they’ll often wind up buying more than they really need.

Anchoring at a high price point

Typical industries: insurance

When you sign up with an insurance company for coverage on a single item—like car insurance—chances are you won’t get an incredible deal. But start adding more coverage across different categories (ex: home, life), and your savings on a per-item basis will increase rapidly.

The psychological trick here is the original price point. The cost to insure a single vehicle, for example, is typically overpriced. But by the time you’ve added three more items to your plan, the bundled monthly rate feels like a steal.

Here, competition is key. Insurance companies know it’s extremely difficult to get people to switch providers, but if they can get you to switch, you’ll bring a potential lifetime’s worth of money their way. Selling you a big, cost-saving bundle will keep you loyal and make it harder for you to switch back. And unlike with cable or internet, most consumers do have three or more insurance options at a given time—so the bundle deals have to be pretty good. This may contribute to why insurance companies enjoy decent customer satisfaction overall—despite the high starting prices—while TV and internet brands rank at the bottom.

Increasing consumer choice to incentivize a quicker purchase

Typical industry: electronics

In perhaps the most famous bundling study of the 21st century, business professors Timothy Derdenger and Vineet Kumar analyzed Nintendo’s various video game bundling strategies from 2001 to 2005. The study’s conclusion? For game consoles, bundling works well, but only with a “mixed bundling” strategy. A mixed bundling approach means consumers have the option of purchasing a bundle of products, or purchasing each of those items separately.

When only selling a la carte, the study found many potential Nintendo customers would hold off on a purchase, assuming a price drop would come eventually. But when Nintendo only sold a bundle, some customers would reject the deal because it included a game or peripheral they didn’t want. With all options on the table, however, the deal seekers found a reason to buy right away, and the less bundle-inclined buyers would still purchase the parts of the combo they wanted.

This is mostly great for consumers, because they can choose the exact purchase they prefer. There’s not a pressing need to bundle home, auto, and life just to get a decent price, or a requirement to buy 300 channels just to watch the playoffs.

Meanwhile, Nintendo benefitted from selling now rather than later. With both types of customers jumping on their preferred purchase option, Nintendo acquired a larger customer base earlier in the life cycle of the console—which meant more opportunities to sell more games over time. It’s perhaps the best example yet of a bundling system that actually benefits both the company and consumer.

Emphasizing the ecosystem

Typical industries: software

There’s one exception to the mixed bundling advantage: a situation where network effects are strong. In this context, “network effects” occur when products or features from a single company get better with each incremental user. This is why companies like Google, Apple, and Microsoft tend to sell you more on their ecosystems overall than on special discounts or bundling options.

That said, some people would still prefer to pick and choose their tools. Perhaps you like using an email service from one of these companies, but not its related suite of work tools. Or you enjoy using an iPhone but tend to use Microsoft software on your desktop. The bundling works well for those who go all the way in on one option, but for the more diversified user, the huge emphasis on the ecosystem can be a turn off. Here, a mix-and-match approach to software can help.

Unbundling: The new wave

Typical industry: streaming services

Naturally, the biggest antidote to cable’s forced bundles are streaming services, the flag-bearers of the un-bundling movement. Instead of paying more than $100 per month for 300 channels, you can pay about $10 to $20 per month for a certain subset of content.

For the right customer, streaming services provide an irresistible alternative to the giant cable offerings of the last few decades. If you mostly want award-winning TV dramas, a small selection of popular films, and periodic comedy specials, services like Netflix, Hulu, and HBO will give you exactly what you want at a fraction of the cost.

Still, a few problems linger. Most live content—like news and sports—doesn’t fit naturally on streaming services. Many popular shows only appear on a single service. And the archive of classic shows and movies on each platform can change weekly based on the latest contract terms.

But perhaps more problematic than all that is the great re-bundling—the fact that many of these streaming services are essentially recreating their own bundles. Want a family plan? Just pay a bit more. How about a DVD-by-mail supplementary service? Have you considered an even higher service tier with fewer ads?

So the streaming world both gives and takes from customers. Letting consumers pick from several low-cost, supplementary options is a great step in the right direction. But recreating a new walled garden after breaking down cable’s fortress could lead to some cable-like problems down the road.

Respecting the customer

Each industry uses its respective bundling strategy for one big reason: it works. But the best bundles do more than simply increase sales; they respect the customer. For the bundle makers, emphasizing convenience, cost-savings, or a great ecosystem is a good start—it’s better than forcing consumers to knowingly buy services they don’t need. Even better, however, is giving customers more choice: a chance to assemble their own bundle, or pick and choose which items to buy a la carte. That’s when bundles evolve from a smart psychological offer to a truly great deal.